Product liability insurance protects businesses from lawsuits in the event that a product causes bodily injury or property damage. This insurance typically covers product-related defects for manufacturers, distributors, and retailers. Because these lawsuits routinely receive the largest jury awards, it’s important to have the right product liability insurance coverage for your business.
In this article, we’ll cover key facts about product liability insurance including what’s covered, what’s not covered, where to buy it, and how much it costs. Be sure you get an insurance quote from a local broker who specializes in your line of business. Contact the pros at Insurance321 today to get started.
Product Liability Insurance Overview
Product liability insurance protects businesses in the event that a product causes bodily harm or property damage. It can cover those who manufacture, distribute, sell, or repair products. It’s so important, that business partners throughout your supply chain may not work with you unless you can provide proof of adequate product liability insurance.
As shown in the graph below, lawsuits related to product liability typically have jury awards with the highest payouts of all liability related suits.
This is why it is so important to understand how product liability insurance works, and how to get the right coverage for your business.
“The very nature of providing a product to the market (consumer, medical, tech, food, etc) creates significant liability exposures” said Matt Miller, the Founder and CEO of Embroker. “Risks are varied, but one constant is that the cost to defend yourself in a product liability suit is substantial– it’s one of the most expensive types of claims against a small business. Product liability insurance allows companies to transfer risks such as litigation expense, property damage and medical expenses to a third party and is the easiest and most effective way to protect your business.”
How Much Product Liability Insurance Costs
The average cost of product liability insurance is 26 cents per each $100 in retail costs (retail costs represent what you sell your goods for), according to Diversified Insurance. However, in most cases, the cost of product liability insurance won’t fall below $2,500 per year. For riskier products, like medical devices, the costs likely won’t fall below $7,000 per year.
So, for example, if you sell $1,000,000 worth of goods per year, your product liability insurance costs might be $2,600 (or 0.0026 * $1,000,000). If you are in a riskier industry (like Biotech) then you can expect to pay closer to $10,000 per $1,000,000 in sales (or 0.01 * $1,000,000). Of course, your actual costs could be much lower or higher depending on the type of product.
The cost of product liability insurance will vary greatly depending on the “risk factor” of your product. This includes the type of product, the size of your distribution, how it’s marketed, and what safety measures are in place. Items like fireworks and firearms will have a higher risk factor than fuzzy slippers and yoga mats.
From the dollar amount of your coverage to your geographic location, there is a lot that goes into calculating how much you pay for your insurance. Here are the most common factors:
- Type of Business: Some industries are riskier than others, and the nature of your business is factored into your cost.
- Geographic Location: The location of your business impacts your property value, local laws, and geographical risks like flooding. All of these factors can drive your insurance costs up.
- Company Value: Valuable companies are likelier targets for lawsuits and have the cash or assets that give them little choice but to pay out. Smaller, less valuable businesses could just go bankrupt and avoid paying a large judgment award.
- Claim History: Business owners generally pay more if there are more claims on their insurance.
- Coverage Limits: All else equal, the higher the payout by the insurance, the more a business owner will pay.
While you can’t control every factor that impacts your product liability insurance cost, there are some actions you can take to limit it.
Tips to Cut Down Product Liability Insurance Costs
Reducing your insurance cost is not an exact science. Your actions won’t give you a standard reduction of cost across all insurance companies. Each company evaluates their risk differently, which makes the amounts they quote you varied. However, there are some general actions you can take to give you a good chance of lowering your insurance costs. Here are 3 tips that might help you:
- Increase Safety Policies: Improve the safety in your business by implementing new safety policies to lower risk. This can lower the number of claims and the dollar amount you could potentially pay for safety-related claims.
- Don’t Get More Coverage Than You Need: Lowering your coverage limits to the amount you absolutely need will likely lower your monthly costs.
- Have Insurance Companies Compete for Your Business: Since product liability insurance is is so varied in its pricing, small business owners should work with a broker to have multiple insurance carriers compete to offer you the best policy at the best price.
TIP: Some people will tell you that not reporting smaller claims can help you save money on your product liability insurance. But that can be a bad idea that will cost you in the end. Many product liability insurance policies have reporting provisions that require business owners to report claims of any size in order to avoid the claim being declined later on if it turns into something big
Now let’s look at the types of coverage typically found in a product liability insurance policy.
What Product Liability Insurance Covers & Does Not Cover
What Product Liability Insurance Covers
Product liability insurance covers two types of damages in potential legal actions:
1. Bodily Injury:
In the event that somebody is wrongfully injured by your product, product liability insurance can cover the cost of care, lost wages, restitution for death, or legal fees (if you’re taken to court.)
2. Property Damage:
In the event that property is damaged due to your product, product liability insurance can cover the value of physical damage, repairs, lost profit due to damages, and legal fees (if you’re taken to court.)
What Product Liability Insurance Does Not Cover
Compared to other types of insurance policies, product liability insurance tends to have a lot of exclusions. Here’s a few examples of common exclusions:
1. Quality Control Exclusion:
Policies usually require you to oversee a certain level of quality control for your products.
2. Reporting Exclusion:
You’re typically required to report any changes in manufacturing (such as new ingredients, materials or components) to your carrier. Failure to do so can mean your product isn’t covered by your policy.
3. Efficacy Exclusion:
A product may be excluded from your policy if it fails to perform its main function. For example, if a fire alarm or home security system fails to go off, or if weed killer, cleaners, or pharmaceuticals fail to do their job, the result will almost inevitably be damaging. Thus, most policies exclude performance failures (known as an efficacy exclusion) unless businesses are willing to pay a higher premium.
4. Material Exclusions:
Many carriers have material/ingredient exclusions. Selling a product that contains a “forbidden” material or ingredient means it won’t be covered by your policy.
In the context of health products, yohimbe, kava kava, lobelia, magnolia, willow bark and creatine are a few examples of commonly excluded ingredients, according to Nutraceuticals World. Businesses can negotiate to have these materials covered, however, for a higher premium.
Product Liability Claim Examples
Here are three examples of common types of product liability claims:
1. Design Defects:
When the initial design of the product is the cause of the injury or damage. A common example is an electronic toy or battery that has a tendency to catch fire when it’s overheated.
2. Manufacturing Flaws:
When the manufacturer causes the injury or damage. An example might be a swing set with a loose or weakened chain. Manufacturing flaws can be one-off instances that were not noticed by quality control.
3. Defective Instructions or Warnings:
When poorly written (or a lack of) instructions causes the injury. In a memorable 1994 case, McDonald’s was sued by a customer for defective labeling on their coffee cups. Served roughly 45 – 50 °F warmer than the average cup, the claimant won her case that the restaurant failed to warn of the coffee cup’s potential hazard.
Common Concerns With Managing Product Liability Insurance
Having product liability insurance can make you feel secure in your business transactions, but managing it may still be difficult. This typically depends on who your insurance company or broker is and how quick they are to respond to your needs. If processing your claims or answering your inquiries is a time consuming process then your broker may treat you like the small fish in their pond.
There are two main concerns that commonly come up for small businesses when they are managing their insurance.
- Working with Certificates of Insurance
- Knowing How Competitive Your Insurance Policy Is
#1 Working with Certificates of Insurance
Certificates of insurance (COI) are used when potential liability or large losses are a concern in a business transaction. A COI must be provided by either your insurance company or your broker to verify your coverage.
Many businesses need to provide their COI in a timely manner in order to win contracts, or to start performance on a new contract. The problem is the difficulty and length of the process of verifying COI’s for both parties. Some brokers may be slower to respond than you need in order to move forward with your contract. At the end of the day failure to provide proof of insurance quickly could cost you money.
For product liability insurance, COI’s are typically shown throughout the supply chain. They are used when goods are manufactured, transported, stored in a warehouse, or sold at a retail store. Before money exchanges hands in a transaction at any of these levels, COI’s are typically exchanged to confirm insurance coverage is in place for the appropriate parties to protect against lawsuits that arise out of bodily injury or property damage caused by the product.
“Commercial insurance can be a huge administrative burden” said Matt Miller, the Founder and CEO at Embroker. “The old way of managing COIs involved a back and forth conversation with the insurance broker. Locating, updating, sending and receiving COIs cost time and effort. We’ve digitized certificates of insurance (COIs) to make compliance easier for businesses and their counterparties, reducing the time to send or track a COI from days to seconds – it’s just one example of what we’re doing to finally move insurance to the modern age.”
#2 Knowing How Competitive Your Insurance Policy Is
As discussed above, there are many things that determine the costs of your insurance. Insurance is an expense that can put you at a competitive disadvantage if it is not managed appropriately. Knowing what the insurance landscape looks like in your industry can help you understand:
- If You Have Enough Insurance
- If You Are Over Insured
- If You Are Paying Too Much For Insurance
1. If You Have Enough Insurance
Knowing what insurance coverages others in your industry are using might give you an indication that you are not covered in areas that you should be. While product liability insurance is pretty straightforward, there are many other types of insurance that you can add to your risk management program. Working with a broker that is knowledgeable about your industry is the best way to make sure you have the coverage you need.
2. If You Are Over Insured
Typically a business can be over insured in four ways:
- Your broker can upsell you on insurance policies you don’t need.
- You may have redundant coverage where you can be covered as a co-insured on one of your partner’s policies. For example, if your partner manufactures the product you distribute then there might be an opportunity to be covered for product liability on their policy. This can save you money but it is also risky because you can’t control when the coverage stops. This means that you may not be notified if their policy ends.
- You make business changes that make one or more of your policies irrelevant to own.
- You are purchasing limits that are too high and do not correspond with your actual exposure.
It is important to save money where you can, and making sure you are not spending money on insurance you don’t need is no exception.
3. If You Are Paying Too Much For Insurance
Small businesses always run the risk of using the wrong broker or insurance company and paying too much for their product liability insurance policy. Knowing what product liability insurance typically costs in your industry and geographic location is important. You do not want to overpay for insurance you can get at a cheaper rate.
So how do you know what insurance and rates are standard in your industry? The insurance industry isn’t exactly known for it’s transparency.
Product liability insurance offers important protection if your business manufactures, distributes, sells, or repairs products. Product liability lawsuits have some of the largest judgments compared to other personal injury claims. Even successfully defending against the suits can be expensive. Because of this, having satisfactory product liability insurance is often a prerequisite for working with partners throughout the supply chain.